Section 15 – Investment in Joint Ventures
Section 15 deals with the recognition, measurement and disclosure for joint ventures.
A joint venture is a contractual arrangement whereby two or more parties undertake an
economic activity that is subject to joint control. Joint ventures can take the form
of jointly controlled operations, jointly controlled assets, or jointly controlled entities.
What is new?
Sections 15.4, 15.5 and 15.66 and 15.8 have identified three forms of joint venture, namely jointly controlled operations, jointly controlled assets and jointly controlled entities whereas under FRS 9 there were only two forms, namely; a joint arrangement and a joint arrangement that is not an entity (structures with the form but not the substance of a joint venture). Therefore, on adoption companies will need to re-assess the contractual arrangements to assess what form of joint venture they fall into under Section 15.
Jointly controlled operations are effectively operations where equipment etc. is shared but ownership does not pass and it is not shared. It is in fact not a legal entity.
Jointly controlled assets are effectively operations where venturers contribute equally towards the cost of one or more assets and they are owned jointly.
Jointly controlled entities are joint ventures that involve the establishment of a corporation, partnership or other entity in which the venture has an interest and there is a contractual arrangement between the venturers establishing joint control over the economic activity.
Jointly controlled operations and jointly controlled assets (Section 15) = joint arrangements that is not an entity (FRS 9). The accounting for these are the same.
What is different?
For jointly controlled entities, section 14.8 makes it clear that losses should be recognised until the carrying amount of the investment is reduced to nil and no further losses are recognised unless the entity has a legal or constructive obligation or has made payments on behalf of the jointly controlled entity. This contrasts with FRS 9 which required the continued recognition of losses even if they exceed the cost of the investment.
In relation to the presentation of the equity accounted results i.e. for jointly controlled entities, the section requires the share of the income to be presented as one line, after the effects of interest and tax. This contrasts with FRS 9 where the share of turnover, operating profit of joint ventures must be shown with interest and tax related to joint ventures being presented alongside the interest and tax line items in the group profit and loss account. FRS 9 also required gross equity accounting which means that the layout on the profit and loss account and statement of financial position will differ. Old GAAP also required disclosure on the face of the balance sheet of the assets and liabilities of the associate to be shown, under FRS 102, the net figure need only be shown on the face of the balance sheet. In addition, old GAAP required the investment in associates and joint ventures to be shown separately on the face of the balance sheet. This is not required under FRS 102.
Section 15 gives an entity which is not a parent the option to account for its investment in a joint venture using either the cost model, fair value model through the other comprehensive income (OCI) or at fair value through the profit and loss account. This compares with old GAAP (FRS 9) where the option to fair value through the profit and loss did not exist.
Other standards affecting Section 14 where differences arise:
Section 11 and Section 12 – Financial instruments – When an entity ceases to be a joint venture due to loss of control, it may need to be accounted for under Section 11 or Section 12 (if ownership reduces to less than 20%) depending on applicability i.e. carried at FVTPL where there is an active market and if not at cost less impairments.
Section 35 – Transition to FRS 102 – For individual entity financial statements the investment can be measured at cost or fair value. Section 35.10 allows a first time adopter to deem the cost to be the carrying amount at the date of transition as determined under previous GAAP.
Section 29 – Income tax – Deferred tax may need to be recognised on investments measured at fair value as well as on unremitted profits.
What are the key points?
- A jointly controlled entity is initially recognised at the transaction price and subsequently adjusted for the investors share of the profit or loss;
- For a venturer who is not a parent or in the parent’s separate financial statements, the joint venture is measured under either; the cost model, fair value model through the OCI (where a decrease occurs below that which was recognised in OCI then the remainder is posted to the profit and loss) or at fair value through the profit and loss account. If the cost model is chosen, the dividends will be shown as income;In the consolidated financial statements under the equity model for jointly controlled entities the share of profits/losses of the joint venture is posted against the investment including any distributions received. Where losses occur the investment cannot be reduced below zero. Goodwill is consumed within the initial investment and is not disclosed separately and amortised over its useful life;
- Where consolidated financial statement are not prepared or the entity is not a parent then the equity method is not used, instead, disclosures are required to summarise the results about the investments along with the effect if they had been accounted using the equity method;
- A joint arrangement and jointly controlled operation accounts for its own share of the assets, liabilities and cash flows in the consolidated financial statements; and
- Where joint control is lost, the investment is then recognised as an associate in accordance with Section 14 – Investments in Associates or Section 11– Basic financial Instruments or Section 12 – Other Financial Instruments Issues depending on the percentage ownership held after disposal.
What do accountants need to do?
Be aware of the differences between Section 15 and old GAAP so that transition adjustments can be determined.
Review their client portfolio to identify clients who are affected by this section and advise those clients on the type of joint venture previous joint ventures will come under when they move to FRS 102 and the implications of this.
What do companies need to do?
Assess whether this standard is applicable to the entity. If applicable, be aware of the differences between Section 14 and old GAAP.
Assess where the Joint venture falls under FRS 102 to assess whether there is a change in the way it needs to be accounted e.g. joint venture previously accounted as a joint arrangement that is not an entity (through recognition of assets, liabilities etc. in the groups balance sheet) could possibly be now recognised as a jointly controlled entity and accounted for through the equity method.